Global trading fuels forex growth

Smaller enterprises are likely to shop around for the best forex deals.
AFR

by
Mark Abernethy

The definition of small business varies but Australia’s largest banks agree on one thing: Australian small businesses are globally trading more frequently than at any other time and they are managing their currency risk with foreign exchange products.

At
ANZ Bank
, where small businesses are classified as those with turnover of $5 million and less, more than a third of business customers now use foreign exchange (FX) services, mostly to hedge their exposure to currency fluctuations and make payments in foreign currencies.

General manager of ANZ small business banking, Nick Reade, says the bank has introduced a small-business product call FX Online, which allows businesses to buy and sell currency positions through a portal that acts in a similar way to traditional online banking.

“FX Online allows the customers to transfer payments anywhere and in any currency," says Reade. “It also allows them to forward-buy amounts of foreign currency as a hedging strategy against currency volatility.

“We have 450,000 small-business customers and around a third of them have used FX Online."

He says the bank makes available FX experts for more complex situations but most business owners prefer to use the website.

“This is part of our super-regional service, allowing even small businesses to engage in the regional economy by having the payments options and risk-management tools that the big corporates have. It’s backed up with specialists in the countries where these businesses are trading."

Reade says the need for FX services is centred on the need for businesses to settle in any currency, and the need also to hedge against currency volatility so the business can plan exactly how much revenue it either receives from a sale or has to pay for an order.

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“Small businesses are highly aware of their costs, and they can’t afford to see their margins eaten up in currency movements before they are paid or have to pay," he says.

“Another trend is that small business people are buying direct from foreign suppliers and cutting out the middleman; it means they have to manage their own currency risk."

The 2012 DHL Export Barometer shows that 72 per cent of exporters now also import (a massive increase on the normal 40-45 per cent range) and the increase in foreign trade activity among even very small businesses is something that the banks have had to bow to, says HSBC Australia head of commercial banking James Hogan.

“The cost of FX services to small business has dropped to about two basis points bid/offer spread," says Hogan, talking about the “spread" the bank earns on its buying and selling of currency. “Foreign exchange has become commoditised as businesses engage in a regional economy, and it’s totally transparent: customers can do FX transactions with the lowest-cost provider, and the costs . . . are being kept down.

“The typical transaction for us is a customer forward-buying a foreign currency to offset its volatility against the Aussie. Some hedge the entire transaction amount and others hedge 50 per cent. It’s a flexible area."

Hogan says that with one-third of Australian small businesses importing or exporting, they are already exposed to currency risk and banks are giving them options.

“We are a bank that specialises in international businesses and so most of our FX customers come through the trade finance service," says Hogan.

“But small businesses are very price conscious and they shop around for the best deal on their foreign exchange. It’s become a very competitive field in Australia because so many businesses are doing it."

He says most of the FX growth at HSBC Australia is in strategies concerned with the yuan (also known as the renminbi, or RMB).

“Twenty-five per cent of all Australian exports and imports are with China, so there’s a big focus at this bank on making everyone comfortable with RMB," he says.

Tim Keith,
NAB
managing director of business markets, says the bank – which defines small businesses as those with turnover of $1 million and less – has rolled out a suite of FX products that allows customers to engage in the global economy.

NAB facilitates international currency payments via a website, branches or a small business banker; there is also a NAB Traveller Card, which is a multi-currency facility that allows currency payments abroad from Australia, and also supports buying activity when the business owner is in-country and wants to purchase from a supplier.

The bank also has an advisory service for more complex hedging strategies, most of which are built on three-, six- and 12-month forward-buying contracts.

With these contracts, the exporter – with typically 60-day payment terms – buys the currency they are being paid in at a fixed upfront rate, to offset the chance that the rate changes dramatically in 60 days.

“So many small businesses are now exposed to the global economy," says Keith. “This area is growing at the same rate as online transactions."